Employee Stock Ownership Plan: How to Unlock Wealth via ESOPs?
- Jasaro.in
- Jul 27
- 6 min read
"If I stay for four years and the company exits, how much could this be worth?"
This one question changes how you think about compensation, and your future wealth.
Welcome to the world of Employee Stock Ownership Plans (ESOPs), one of the most powerful (yet misunderstood) tools in startup compensation.
While your paycheck pays the bills, ESOPs are how you build wealth. But they only work if you understand them, ask the right questions, and play the long game.
In this post, I’ll demystify:
What ESOPs really are?
Why they matter for both employees and founders? and
How to evaluate them smartly?
Whether you're joining a startup or building one, consider this your master guide to equity ownership.
What is an Employee Stock Ownership Plan (ESOPs)?
An Employee Stock Ownership Plan (ESOP) is a program that gives employees the right to purchase company shares, typically at a fixed, discounted price, after a certain time period (called the vesting period.) Think of it as getting a future opportunity to own a piece of the company. Let's explain ESOP using a hypothetical example:
You’re granted 1,000 ESOPs at a strike (grant) price of ₹20.
You pay: ₹20,000 (20 × 1,000).
If the company exits at ₹200 per share, which is subsequent to your vesting period:
You receive: ₹200,000 (200 × 1,000).
Your profit: ₹200,000 - ₹20,000 = ₹180,000 (before taxes.)
That’s not bad for sticking around and believing in the mission early.
Why ESOPs Matter (For Employees and Founders)?
For Employees: It’s About Upside
For those joining early-stage startups, ESOPs are your shot at long-term upside.
You’re betting on the future of the company and your role in shaping it.
Ownership (Skin in the game): You’re not just working for the company, you’re helping build it.
Believing Early (Potential wealth): If you join pre-Series A, even a small grant can grow big, if the company scales.
For Founders: Attract, Reward, Retain
Founders often struggle to compete on salary, but equity is where you can win.
Talent magnet: ESOPs attract driven, mission-aligned talent.
Retention booster: Vesting schedules keep key people around.
Culture builder: A well-communicated ESOP plan signals fairness and transparency.
💡 Pro Tip for Founders: Don’t wait till your Series A to create an ESOP pool. Start early, even if it's small, ownership starts with belief.
The Core ESOP Terms You Need to Know
Let’s break down some jargon. These key terms will come up in every ESOP discussion, so learn them well:
Grant: The number of stock options you’re offered.
Vesting: The schedule over which your options “unlock,” often 4 years with a 1-year cliff.
Cliff: The minimum time you must stay before receiving any shares. (Typically 1 year.)
Strike Price: The price you’ll pay to exercise (buy) your options.
Exit: An IPO or acquisition, the moment when you can sell your shares.
🎯 Tip for Employees: Always ask about these terms when joining a startup.
Why Most People Never See ESOP Returns?
Despite the buzz, many employees walk away with zero gains from ESOPs. Here’s why:
They leave before the vesting cliff.
They never fully understand the strike price.
The startup never reaches an exit.
There are no buyback or secondary opportunities.
It's not just about effort. It’s also about timing, luck, and patience. And above all, understanding what you’re signing up for.
How to (Smartly) Evaluate an ESOP Offer?
If you're being offered ESOPs, don’t just look at the headline number of shares. Ask smarter questions like:
What percentage of the company does this represent?
10,000 shares might sound great, until you realize there are 100 million total shares.
What’s the strike price? How does it compare to current valuation?
You make money only if the stock price goes above the strike price.
Are there any planned liquidity events or buybacks?
If there’s no clear path to exit or cash out, your ESOPs could stay paper-only forever.
What’s the vesting schedule and cliff?
Clarity on timeline = clarity on risk.
Can the leadership clearly explain the ESOP plan? If not, that’s a red flag.
🧠 Key question to ask:
If I stay for 4 years and the company exits at X, how much could this be worth?
Make the founder walk you through the math. Clarity now prevents regret later.
Can ESOPs Actually Make You Wealthy?
Yes, but only under the right conditions:
✅ You stay long enough to fully vest
✅ The company scales significantly
✅ There’s a clear exit, buyback, or secondary market
✅ Your strike price leaves room for upside
🚫 ESOPs aren’t a lottery ticket. They’re a long-term wealth-building tool, and they require patience, risk tolerance, and belief in the company.
How Founders Can Make ESOPs Work?
If you're a founder, your goal is to turn ESOPs into a real incentive, not just a bullet point in the offer letter. Here’s how:
Set aside 10–15% of the cap table for an ESOP pool.
Allocate based on contribution, not just job title.
Communicate clearly during hiring and reviews, use simple math and examples.
Create internal guides to explain terms, vesting, and value.
Plan liquidity opportunities, like partial buybacks around Series B.
🎯 Bottom line: Ownership only works when people understand what they own.
ESOPs vs. CTC: Know the Difference
If you're a job-seeker, remember:
ESOPs are not your in-hand salary.
They may appear in your Cost to Company (CTC) but don't pay rent today.
Think of them as long-term bonuses, not immediate benefits.
Don’t anchor your decision on ESOPs alone. If you need cash now, optimize for salary.
💡 Rule of thumb: If your rent depends on it, it’s not compensation.
How are ESOPs Taxed in India?
ESOPs in Indian startups are taxable, primarily at exercise and at sale, but eligible startups can offer tax deferral. Let’s briefly explain given the hypothetical example (shared earlier) with 2 tax scenarios:
I. Standard Taxation (Non-eligible Startup or No Deferral Claimed)
a. Vesting at Year 3 (for e.g., startup buys back the ESOPs)
Fair Market Value (FMV) = ₹100/share.
Perquisite Value = (₹100 - ₹20) × 1,000 = ₹80,000, which is added to the Employee's salary income, and taxed at her/his slab rate (incl surcharge + cess).
Employer deducts TDS.
b. At Sale (Year 5): Startup exits at ₹200 per share.
Taxable as Capital Gains.
Capital Gain = Sale Price (₹200) - FMV (₹100) x 1,000 = ₹100,000
The capital gain is taxed based on holding period from exercise date (vesting period)
STCG if < 24 months @ 15%; LTCG if >= 24 months @ 10% above ₹100,000 exemption.
II. Tax Deferral (Eligible Startup u/s 80-IAC & Few Conditions are Met):
a. At Exercise (Vesting) i.e. Year 3: No immediate tax. Tax liability deferred.
b. Deferral Ends (Earlier of):
At Sale (Year 5): Original perquisite (₹80,000) and Capital Gains (₹100,000) are taxed in Year 5.
Perquisite Tax: ₹80,000 added to Year 5 salary income.
Capital Gains Tax: ₹100,000 taxed (likely LTCG @ 10%), or
If 4 years from vesting (Year 7): If not sold by Year 7, ₹80,000 perquisite taxed in Year 7 as salary income.
Key Conditions for Deferral (Section 80-IAC):
Startup holds DPIIT recognition.
Startup is incorporated after April 1, 2016.
Startup's turnover is below ₹100 Cr in the year of option grant.
Employees receive ESOPs during the first 10 years of the startup's incorporation.
The employee doesn't hold >10% of the company's shares.
ESOPs are taxed in India. The main tax hit comes at exercise (as salary perquisite/income).
Eligible startups allow employees to defer this tax until the earliest of selling the shares or 48 months after the financial year of exercise. Capital gains tax applies upon sale regardless.
Final Thoughts: ESOPs aren’t Lottery Tickets, They're Ownership
Here’s the truth: ESOPs can change your life, but only if you understand how they work. Whether you're joining a high-growth startup or launching one yourself, treating equity seriously can align incentives, build wealth, and create a sense of true ownership.
So next time someone throws out an ESOP number:
Don’t just nod, ask the right questions.
Do the math, and now your cliff.
Remember: Ownership isn’t given, it’s earned, understood, and managed.
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